TAXATION LAW AND PRACTICE 2 INDIVIDUAL ESSAY2000 WORDS EXCLUDING REFERENCES AND BIBLIOGRAPHYDue...

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TAXATION LAW AND PRACTICE 2 INDIVIDUAL ESSAY2000 WORDS EXCLUDING REFERENCES AND BIBLIOGRAPHYDue date:14 January 2013Gordon and his wife Pamela have finally decided to retire.They set up a chocolate business sixteen years ago when they obtained the Australian rights to an American chocolate company. They proceeded to manufacture and wholesale the chocolates and also opened up some cafes and retailed from those premises. They used a company called “American Chocolates Pty Ltd” for all these purposes. There were only two shares in that company and one share is allocated to Gordon and one share is allocated to Pamela.Their son Joshua has taken over the business and has been successfully expanding the business for the past ten years. Gordon and Pamela mortgaged their home to finance the expansion but their son repaid the loan in full. The business operates all over Australia and is well known.Gordon’s son has never paid anything for the business. However their son has now offered to pay his parents $6million. In return they have agreed to transfer all their interest in the business and company to Joshua. Their son wants to claim a tax deduction for that payment but Gordon and Pamela have asked you how they should treat this payment.Advise Gordon and Pamela about capital gains and income tax consequences and any effect that their son’s tax treatment of the payment will have on them. You should discuss possible discounts and exemptions that may be available to them.Make sure you include proper citations in your assignment (about 3 per page).Do not bother using “cut and paste” or copying other assignments. You will fail.This is a law assignment and not an English assignment.
	
Document Preview: TAXATION LAW AND PRACTICE 2 INDIVIDUAL ESSAY2000 WORDS EXCLUDING REFERENCES AND BIBLIOGRAPHYDue date:14 January 2013Gordon and his wife Pamela have finally decided to retire.They set up a chocolate business sixteen years ago when they obtained the Australian rights to an American chocolate company. They proceeded to manufacture and wholesale the chocolates and also opened up some cafes and retailed from those premises. They used a company called “American Chocolates Pty Ltd” for all these purposes. There were only two shares in that company and one share is allocated to Gordon and one share is allocated to Pamela.Their son Joshua has taken over the business and has been successfully expanding the business for the past ten years. Gordon and Pamela mortgaged their home to finance the expansion but their son repaid the loan in full. The business operates all over Australia and is well known.Gordon’s son has never paid anything for the business. However their son has now offered to pay his parents $6million. In return they have agreed to transfer all their interest in the business and company to Joshua. Their son wants to claim a tax deduction for that payment but Gordon and Pamela have asked you how they should treat this payment.Advise Gordon and Pamela about capital gains and income tax consequences and any effect that their son’s tax treatment of the payment will have on them. You should discuss possible discounts and exemptions that may be available to them.Make sure you include proper citations in your assignment (about 3 per page).Do not bother using “cut and paste” or copying other assignments. You will fail.This is a law assignment and not an English assignment.

David · Accepted Answer

SOLUTION: 
In the given case scenario, Gordon and Pamela obtained Australian rights to the American 
Chocolates Pty Ltd., in which both of them are the only shareholders. Company is selling 
chocolates in Australia and also owns various cafes in the country. During the expansion period, 
they also mortgaged their personal property in order to finance the expanding provisions and 
Joshua also repaid the loan amount back to Gordon and Pamela. Now, Joshua, who is currently 
expanding the business from last 10 years, is interested to take over the business and is ready to 
pay $ 6 million to his parents in order to acquire the company of which they are shareholders. 
In the given case, Gordon and Pamela are the shareholders of the company. Company in the legal 
is a distinct legal entity and is having a common seal. Company is having its own separate legal 
entity and is considered a distinct person in the court of law.  Hence, in the given case as Gordon 
and Pamela are carrying on business under the name of American Chocolates Pty Ltd. of which 
they are shareholders, and the money which they are receiving from Joshua, $ 6 million will be 
taxable in the hands of American Chocolates Pty Ltd. Hence all the taxable effects i.e. mainly 
capital gains under takeovers taxable will be in the hands of American Chocolates Pty Ltd. of 
which Gordon and Pamela are shareholders. Following are the provisions which reflect the 
provisions to be explained in detail: - 
The cost base of a capital gains tax (CGT) asset is normally the cost of the asset when you 
bought it. However, it also contains certain other costs associated with obtaining, holding and 
positioning of the asset. 
For most CGT proceedings, you need the cost base of the CGT asset to work out whether you 
have made a principal gain. If you have made a principal loss from these events, the abridged 
cost base of the CGT asset is applicable for your calculation.  
Market value substitution rule 
In certain cases, if you receive nothing in interchange for a CGT asset (for example, if you give it 
away as a gift) you are taken to have established the market value of the asset at the time of the 
CGT event. You may also be occupied to have received the market value if: your capital profits 
are more or less than the market value of the CGT asset, and you and the buyer were not dealing 
with every one  at arm's length in connection with the event. This is known as the market value 
substitution rule for capital profits. You are said to be dealing at 'arm's length' with somebody if 
each party acts self-sufficiently and neither party workouts inspiration or control over the other 
in connection with the contract. The law looks at not only the connotation between the parties, 
but also the quality of the negotiating between them. A corporation is subject to double taxation. 
Its earnings are taxed first at the commercial level when earned, then again at the stockholder 
level when dispersed as dividends. An S corporation, by contrast, is subject to single-level 
taxation, much like a partnership. Its earnings are accounted for at the corporate level but are 
taxed only at the shareholder level. A corporation is a separate entity taxed on its income at rates 
ranging from 15% to 35%.4 a corporation must report all its income and expenses and compute 
its tax liability. Completed Shareholders are not taxed on the Corporation’s earnings unless these 
earnings are distributed as dividends. Through 2012,

TAXATION LAW AND PRACTICE 2 INDIVIDUAL ESSAY 2000 WORDS EXCLUDING REFERENCES AND BIBLIOGRAPHY Due date:14 January 2013 Gordon and his wife Pamela have finally decided to retire. They set up a...

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